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4 A collapse in the U.S. housing market … U.S. Housing Starts and Months Supply of Existing Homes U.S. S&P/Case-Shiller Home Price Index per cent, year over year thousands, at annual rates level, months supply at current sales rate Housing Starts (left scale) Months supply of existing homes (right scale)

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8 Credit spreads increased sharply… Credit Spreads Notes: These spreads are a measure of banks’ funding costs relative to a risk-free rate and are a gauge of financial market stress and banks’ financing pressures. The rate on the overnight-indexed swap (OIS) is used as a proxy for expected overnight rates. LIBOR is the London Interbank Offered Rate. CDOR is the Canadian Dealer Offered Rate. Daily data up to and including April 24, Source: Bloomberg. basis points

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11 Can we really speak of the financial sector separately from the “real” economy? Economists were soon reminded of the importance of credit to production and employment. Financial markets and the “real” economy?

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12 Source: Bank of Canada. Year-over-year percentage change Industrial production in major economies slowed sharply... and then fell off a cliff! Industrial Production

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13 We were faced with the first synchronized global recession in over sixty years … World Economic Growth per cent Forecast Actual Note: World real GDP growth on a purchasing-power parity basis. Source: International Monetary Fund World Economic Outlook, April IMF’s threshold for a global recession

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15 The knowledge that recessions triggered by financial stress tend to be longer and deeper … Source: IMF World Economic Outlook, April Duration and output loss

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16 … led to an internationally coordinated response. G-20 Commitments: Restoring global growth by coordinated fiscal actions and a full range of monetary policy instruments. Strengthening the financial system by the introduction of stronger regulation and improvements to international cooperation. IMF recommendation to provide fiscal stimulus of 2 percent of GDP.

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17 Canadian Economic Context, January 2009

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18 Canadian banks were less leveraged than banks in other developed countries … Bank Leverage Ratios assets as a multiple of capital Note: Based on data for the big six Canadian banks, seven major banks from the Euro area, six major UK banks and five large U.S. commercial banks. Canadian data are based on the regulatory ratio of assets (including some off-balance sheet items) to adjusted Tier 1 and Tier 2 capital. Leverage for other countries is measured as the ratio of balance sheet assets to shareholders' equity. Sources: Bloomberg; financial statements.

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21 Household balance sheets were in better shape in Canada than in the United States … Net Worth to Personal Disposable Income Sources: Statistics Canada; Department of Finance. ratio Household Debt to Net Worth ratio Source: U.S. Federal Reserve Board, Statistics Canada.

22
22 … but the decline in consumer confidence still pointed to some likely retrenchment. Consumer Confidence Index, 2002=100 for Canada, 1985=100 for U.S. Sources: The Conference Board of Canada; The Conference Board. *2009Q2 data is preliminary as it includes only April 2009.

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23 Canadian public finances were in good shape … Total Government Net Debt to GDP Ratio per cent Federal Net Debt per cent of GDP ActualForecast Sources: Department of Finance; Statistics Canada. Public Accounts basis. Source OECD Economic Outlook (March 2009 update); Department of Finance calculations. National Accounts basis.

24
24 … but that could not shield Canada from a U.S. recession. U.S. Real Final Domestic Demand and Canadian Real Exports Growth per cent In 2008, 73% of Canadian exports went to the U.S. Sources: Statistics Canada; U.S. Bureau of Economic Analysis.

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27 Growth Per Capita Real Gross Domestic Income per cent Sources: Statistics Canada; Department of Finance. … real income (GDI) had declined sharply … U.S. up just 7.3% over the same period; over 15% in Canada

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31 Theme 1: Ensuring a Sound Financial System The Government had taken some actions in 2008 to strengthen the financial system. Budget 2009 established the Extraordinary Financing Framework, containing several measures.

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35 … and perhaps would not be sufficient anyway. Consumer ConfidenceBusiness Confidence Index, 2002=100diffusion index (50=no growth) Sources: The Conference Board of Canada, Institute for Supply Management (ISM) non-manufacturing survey. Canada (left) U.S. (right) Index, 2002=100 for Canada, 1985=100 for U.S. Sources: The Conference Board of Canada; The Conference Board. *2009Q2 data is preliminary as it includes only April 2009.

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39 … with a variety of “sectoral” measures. Capital Cost Allowance Computers Manufacturing and processing M&E Tariff relief on machinery and equipment Sectoral adjustment Community Adjustment Fund Support to automotive sector in collaboration with Ontario Support for culture and the arts Clean energy technologies Support to small businesses

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40 Income-tax cuts were aimed at low- and middle- income earners. 1. Significant personal income tax relief Increases in basic personal amount 2. Increases to the National Child Benefit and Canada Child Tax Benefit 3. Doubling the tax relief provided by the Working Income Tax Benefit (WITB) Reduction in MTR for very-low-income earners 4. Increase to the Age Credit amount

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43 The low debt-to-GDP ratio suggested to many that the government could have done much more than it did: Bigger increase to spending Bigger tax reductions or EI improvements Could it? Theme 3: The importance of fiscal prudence

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46 1. Infrastructure is difficult to scale up 2. Tax cuts and EI changes are difficult to reverse  Government struck a balance between what was feasible and what was affordable over the medium term Can policies be scaled up or reversed?

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47 … to ensure that G/GDP comes back to current levels in the medium term. … to repay the current deficits once surpluses return. … over the next 10 years to prepare for the coming fiscal challenges caused by demographic change. Fiscal discipline will be necessary …

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Summary

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49 The 2009 budget was designed to: Improve Canadians’ access to credit and restore their confidence in the financial system; Dampen the slowing effects of the global recession; Protect and assist the most vulnerable individuals during these challenging times; Retain Canada’s hard-won fiscal prudence so that we are prepared for future challenges.

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50 Measures to accelerate Budget Implementation BIA 2009 received Royal Assent on March 12 th (compared to June 18 th for BIA 2008) Included $7.6 billion in spending authority for a range of measures, many of which would normally be funded through the annual appropriations process Streamlined process for Cabinet and Treasury Board consideration and approval New Central Vote in the Main Estimates allows for the release of Budget 2009 funds between April and June subject to Treasury Board approval Spring Supplementary Estimates expected to be tabled in mid- May with supply obtained early June